Budget in times of Covid-19

June 23, 2020

Making a budget for Pakistan is always tough but it has been particularly difficult this year. The economy is in doldrums, in part due to the Covid-19 pandemic, and it is hard to even estimate when...

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Making a budget for Pakistan is always tough but it has been particularly difficult this year. The economy is in doldrums, in part due to the Covid-19 pandemic, and it is hard to even estimate when the impact of the pandemic will recede and life return to normal.

Moreover, given the lacklustre performance of the taxman and the record deficits we have encountered over the last two years, the options available to the government are also limited. It is against this background that we have to analyse the new budget.

Budgets should reflect the prevailing economic conditions and the fiscal situation of the government. The budget you make when the economy is growing healthily should be different from the one you propose when the economy is contracting. Revised estimates tell us that our economy grew at an anaemic 1.9 percent last year (lower than the population growth of 2.4 percent) and this year the government concedes it will shrink by 0.4 percent. Independent economists estimate the growth rate this year to be negative 1.5 percent.

On top of that, we had a record deficit last year of 9.1 percent of GDP and in the current year it is expected to top 10 percent. Compare this to the average deficit of less than 6 percent during the PML-N’s five years of government and we can see how fast the fiscal situation has deteriorated in the last two years.

There are three main reasons for the recent record deficits. First is the inability of the present government to increase revenues. During its five years, the PML-N increased FBR taxes at a compounded growth rate of 14.5 percent, increasing revenues from Rs1946 billion to Rs3840 in five years. Had the current government maintained that pace, last year the FBR would have raised Rs4400 billion. Yet in two years the FBR hasn’t yet crossed the Rs3840 mark we achieved. Whereas this year after adding new taxes of Rs700 billion the FBR had set a target of Rs5555 billion, it was only going at a pace of Rs 4450 billion till February, about Rs 1100 billion behind target. Now with Covid-19 the revised target is only Rs 3908 billion and that too after classifying Rs 100 billion given in tax refunds as grants. (Normally tax refunds are deducted from FBR revenues). Hence one reason for the ballooning deficits is the failure of the FBR to raise targeted revenues.

Some analysts mistakenly think that the fall in FBR revenues can be attributed to a fall in imports as around half of our revenues come from the ports in the shape of customs duties, sales tax and withholding tax. But in reality, whereas imports have decreased over the last two years in dollars, they have actually increased in rupees due to the heavy devaluation. Thus tax collection due to imports, as well as overall tax collection, should have risen actually. The reasons for decrease lie elsewhere, including a slowing down of the economy in the last two years and frequent changes of personnel, and require a serious introspection by this government.

A second reason for the increase in deficits is the PTI’s inability to control current expenditures. Had the PTI government stuck to its promise of austerity, it perhaps could have made a small dent in deficits; in the event it’s current expenditures are rising much faster than the growth in national income or tax revenues.

The third reason for the huge deficits – and also for the slowing down of the economy – is the steep rise in interest rates. This steep increase means that interest payment on debt has doubled compared to the last year of the PML-N government. Now, however, even if interest rates come down to the same level they were in May 2018, debt servicing will still be more than 50 percent higher than two years ago.

This is because in a short period of two years the PTI by end-June will have added 50 percent to our national debt. Additionally, because the State Bank has converted a lot of our short-term debt into long-term instruments at interest rates as high as 13.25 percent, even the reduction in interest rates won’t fully translate into a reduction of debt service cost. So very high debt service payments are going to be a constant feature for our budgets.

At a time when an already slowing economy has gone into contraction due to Covid-19, tax revenues aren’t rising and deficits are at record levels, making a budget is nothing less than a high-wire act. Even so I think there are certain things the government could have done this year to rise to the challenge presented by covid.

The first thing I would recommend is an increase in development spending that relies on local labour and raw materials. For instance, the PSDP could allocate money for renewed effort to build roads, bridges, clinics, schools, etc. This would provide job opportunities to our people, especially those who have been laid off recently.

I would also recommend that the government re-examine certain taxes to see if it can give some tax breaks in order to get the economy moving again. The government could consider giving income tax relief to salaried people like the PML-N did in its last year and which the PTI took away within a month of coming into power. (The cost of this is no more than Rs90 billion). Or the government can consider reducing the sales tax rate by one to two percent, which would increase consumer spending and industrial production. I would also recommend that to get the economy moving the State Bank urgently reduces interest rates.

Given that we already have had two years where deficits have exceeded 9.1 percent, next year’s deficit target of 7.1 percent seems too conservative. The main objective next year should be stimulating the economy and creating job opportunities. That is not to say that the FBR should not do its job of better collecting revenues. Surely the reduction in tax-to-GDP ratio under the current government is both dangerous and contrary to the PTI’s manifesto. But to cut development spending at a time of economic contraction seems counterproductive.

I have been quite critical of this government in my columns so I want to end today with some praise for it. The increased allocation for the BISP/Ehsaas programmes due to Covid-19 – both in the current fiscal year and next year – is a commendable step. At a time when economic activity is curtailed, helping the poor is our greatest national duty and I am happy the PTI has allocated more money towards this urgent national goal.

I would recommend that this year the government should focus more on training and skill development of the poor people. The importance of langarkhanas or BISP stipends are often not appreciated by those of us who have food in the pantry. But these are most important to those who have no income, and mouths to feed. In the end of course we have to make sure that everyone has enough skills and opportunities to move from a langarkhana to a karkhana. Only this will lead to a stronger Pakistan.

The writer has served asfederal minister for finance, revenue and economic affairs.

Twitter: MiftahIsmail



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